South Bay industrial market strengthens in '12

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Although the South Bay industrial market became significantly stronger in 2012, Otay Mesa still has a long way before returning to balance.

According to a Cassidy Turley report compiled by brokers Darren Mullins and Erik Parker, the last 12 months of leasing activity has shown positive signs of improvement.

Otay Mesa for example, posted 753,000 square feet of positive net absorption with 49 completed lease transactions and an average first year rental rate of 48 cents per-square-foot triple net. During the recession, these rents got as low as 25 cents by some accounts.

By contrast, Chula Vista’s rates were running at about 64 cents per-square-foot triple net as last year drew to a close.

While the taken space in Otay Mesa in 2012 is an increase of some 734,000 square feet from the mere 19,000 square feet of net absorption in 2011, it would still take nearly five years to fill the estimated 3.66 million square feet of vacant industrial space at the 2012 rate of absorption.

“That sounds about right,” Mullins said.

Still, the Cassidy Turley report was decidedly upbeat about the South Bay industrial market.

“The fourth quarter picked up where the third quarter left off with a high level of buyer and seller activity, the report stated. "Factors contributing to this activity stemmed from both buyers and sellers desire to finalize transactions prior to year end.”

Buyers, Cassidy Turley said, have shown more confidence in the market due to low SBA loan rates, availability of high quality buildings and sellers that were determined to avoid increases in the capital gain tax rate.

The building sales market improved its performance performed in the last quarter of 2012 with modest increases in both pricing and buyer demand.

“In fact, 2012 marked the first year since 2008 in which the market experienced an upward trend in values for high quality buildings between 10,000 and 60,000 square feet,” the report added.

More specifically, compared to 2011, industrial building values saw an impressive increase of 16.31 percent from $65 to $75.60 per square foot, CT wrote.

The fourth quarter saw 20 new signed leases totaling 319,903 square feet, bringing the overall vacancy rate down across all South County submarkets.

Life Christian is one of numerous religious groups that have set up shop in an industrial park.

Building sales activity included an approximately 65,133-square-foot building at 885 Gateway Center Way, for $7,052,000 or $108.27 per square foot; an approximately 29,000-square-foot building at 7565 Siempre Viva Road, for $2,131,500 or $73.50 per square foot; and an approximately 10,670-square-foot building at 2865 Main Street in Chula Vista, for $1,057,000 or $99.06 per square foot.

The buyers for these buildings were partnerships controlled by the Culligan water company, Standard Plumbing and Racks Inc., respectively.

“Property values are expected to further recover; however, inventory of high quality industrial properties will struggle to keep pace with buyer activity,” Cassidy Turley wrote. “For the first time in several years, the leasing market is expected to inch towards improvement, as new tenants increasingly explore the South Bay to reduce occupancy costs while maintaining a prominent image.”

Industrial rental rates didn’t do a lot in 2012, and are expected to remain more or less unchanged throughout 2013.

The report added that if the South Bay industrial market is to fully recover, new company immigration will be a crucial component to furthering the downward trend of vacancy rates.

Otay Mesa checked in with the highest overall vacancy rate at 25.3 percent, followed by San Ysidro with a 23.3 percent industrial rate with 305,252 square feet of available space, Chula Vista at 14.9 percent and 802,873 square feet of vacant space, and National City at 8.1 percent with 187,432 square feet of vacant industrial space.